Busch: We're Saved, We're Saved, We're Saved by Government!

Friday on CNBC's Power Lunch , we had a stimulating conversation about the way forward for the US economy.

As you by now know, I'm skeptical of the recent stock market moves to the upside as I don't see it supported by the "green shoots" theory of the economy falling at a slower rate of descent.

However, I feel remiss in that I did miss the upside volatility that has emerged over the last 15% of the S&P rally.

Truly, I should've seen it coming and here's why: since we had the largest, global economic slowdown/recession/depression since the Great Depression, then we had the largest global, governmental response since the Great Depression.

If we had insanity on the downside, then when it stabilized we had insanity on the upside. Makes sense in an insane way. Anyone who has teenagers in their house, knows what I mean.

I would argue that the insanity to the upside was due not only to the actions of the US, but also from the response by the Chinese.

In February, I wrote an article for Stock, Futures, and Options magazine entitled, "Why China Must Carry The World" and indeed they have.

Initially, the markets believed that the Chinese stimulus plan would be rather small (4 trillion yuan) in comparison to what the United States was doing.

But this missed the target.

Unlike the United States, China can encourage bank lending and make it happen. In the first four months of the year, China's new loans exceeded their central bank's target for the entire year. In March alone, Chinese banks lent a record 1.89 trillion yuan. Now that's what I call front loading! This lending along with the stimulus spending is why Chinese government officials have been saying their economy is quickly improving. We know that South Korea, Taiwan, and Japan have all seen increased exports to China over the couple of months.

In the United States, we know that the $288 billion in tax cuts are starting to work their way through the economy. In May, 52 million people are expected to receive $250. This spending is part of the $787 billion stimulus plan that also has $499 billion in aid to states. Some of this is already in place with unemployment benefits extended, food stamps, and health benefits. The shovel ready part is a paltry $75 billion and should get going soon.

The point I brought up on Friday was this: what happens about mid-summer when the incremental impact from the US stimulus is minimal? Where do we get growth from?" If the unemployment rate is going higher and the financial system is still fragile, then what happens? Others are questioning what will happen as well. Moody's Mark Zandi puts it this way, "The moment of truth is coming. If we don't see something real in the data by June, then I get very nervous."

I'm not waiting for June to get nervous.



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Andrew Busch
Andrew Busch


Andrew B. Busch is Global FX Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece andreach him here and you can follow him on Twitter athttp://twitter.com/abusch .